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An Evaluation Of The Impact Of Supervision And Control Of The Central Bank On The Performance Of Commercial Banks(A Case Study Of Access Bank Nig Plc Lagos Branch)

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Abstract

This research project tends to evaluate the impact of supervision and control of the Central Bank on the performance of commercial banks. Access Bank Nig Plc Lagos Branch was used as the case study. To aid this research both primary and secondary data were collected. The instruments used to collect data are questionnaires and oral interviews. The respondents comprised of male and female from the bank and the population put together is 150 and sample size is 109. The research design used for this work is the survey research method. In the course of this research the researcher found out that supervisory and control function when conducted on a timely and unbiased manner ensures capital adequacy, high standard of conduct, moderation of bank charges and profitability. The researcher recommends that bank inspections should continue to be regular and timely enough; control measures of the CBN should not be too stringent as to have long negative impact on banking operations. Finally o

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

The roles of commercial banks play in the process of economic development in every country are crucial. They through  financial intermediation increase the levels of national savings and investments by mobilizing idle funds from surplus spending units(savers)and channel  its pending units(borrowers) for investments in the economy.  (UGBAJA 1999) By playing the roles within a particular country,the independence of global economics created the need for global inter banking,a trend which in turn emphasizes the need for the stability of the banks involved in intercontinental banking transactions. Also,banking business carries a lot of risks and banking public needs assurance about the safety of their confidence in the banking institutions. The need for supervision and control of commercial banks activities is to ensure that they adhere to the stipulated monetary policies,rules and regulations as well to the failure of Nigerian banks in the past can be described as moral hazard(adverse incentives)Moral hazards or adverse incentives are a concept with relevance to a variety of principal agent relationship characterized by asymmetric information. The moral hazard concerns the adverse incentives on banks chief executives to actin ways which are contrary to the interests of the banks creditors(mainly depositors or the government if it explicitly or implicitly insures deposits)by undertaking risky investment strategies(such as lending at high interests rates to high risk borrowers)which,if successful,would `jeopardize the solvency of the bank. Bank owners have incentives to under take such strategies because  with limited liability,they bear only a portion of the downside risk but stand to gain through higher profits,a large share of the upside risk .In contrast,the depositors(or the deposit insurers)gain little from the upside risk but bear most of the downside risk. The inability of depositors to adequately monitor bank directors,because of the asymmetric information allows the latter to adopt investment strategies while entail higher levels of risks.

Firstly,an increase in the interest rate may lead borrowers to choose investments with higher returns when successful but with lower probabilities of success (Stieglitzand Weiss 1989)hence arise in deposit rates could induce banks to adopt more risky investment strategies. Arise in bank lending rates can have a similar incentive effects on the banks borrowers.

Secondly,macro economic instability can also worsen adverse incentive if it were to affect the variance of the profits of the bank borrowers especially when there is a co-variance between borrower’s profits.(E.g.if a large share of borrowers are in the same industry) or if loan port folios are not well  diversified among individual borrowers.(McKinnon1988)

Thirdly,the expectation that the government will bail out a distressed bank may weaken incentives on bank executives to manage their asset portfolio prudently and incentives on depositors to monitor banks and choose only banks with a reputation of prudent management .Deposit insurance also reduces incentives for depositors to monitor banks.

Fourthly,moral hazard is inversely related to bank capital.The owners of poorly capitalizedbankshavelittleoftheirownmoneytoloosefromriskyinvestment hazard because,as  the value of the bank’s capital falls,the incentives on its owners to pursue strategies which  might  preserve its solvency are reduced (Berger et al.1995 pp 398-99) for similar reasons intensified  competition in banking market can also encourage moral hazard by reducing the franchise value of banks future profits.

Moral hazard becomes even more acute when the bank lend stop projects connected to its own directors or managers(insider lending).In such cases the incentives for imprudent and fraudulent bank management are greatly increased in that all of the profits arising from the project are internalized.(in the case of loans unconnected borrowers the project returns are split between lender and borrowers)where as that part of the losses borne by depositors or task payers are externalized. Not surprising, insider lending is a major cause of bank  failure around the world. These ills going on in the commercial banks,as stated above make it imperative for the central bank of Nigeria(CBN) to be on the watch at all times through their supervisoryandcontrolfunctionssoastoprotectthemfromgoinginsolvent which usually impacts negatively on the economy in general. implying that the financial position of a bank has worsened can have a negative impact on all the cash flow in that bank.Therefore, every bank will attempt to conceal the problem of insolvency. Banks are highly successful in this respect and therefore,the  problem of insolvency is often not recognized in time by the government agencies entrusted with bank supervision.

Problems in the banking system or in the economy as a whole occur when a number of banks become insolvent,or when a relatively large share of the liabilities of the banking system is not covered by good assets. The occurrence of such  problems indicates that the efficient asset  and  liability management is present in a significant portion of banking, if a large part  of banks asset is allocated to unprofitable projects. There will be a reduction in investment efficiency and there by as low down on economic growth.These could be decrease  or seizure  of loans grants  to the public when the problems of bank insolvency begin to be resolved.When banks attempt to restore solvency by ceasing to grant loans to bad client sand raising the interest speeds, there is less available loan and they are more expensive. One consequent can be thenegativeselectionofclients.Enterprisesthatdonothavealternativesources whether the projects to be finance are profitable or less profitable. Such a trend could also exert a negative impact upon investment efficiency.

If banks attempt to solve the problems of insolvency by raising additional funds, interest’s rates will rise and there will be pressure to conduct as ofter monetary policy.Banks also seize additional liquidity in foreign countries which affects the trends in the balance of payments.

The right which the central bank of Nigeria has to supervise and control the banking industry is backed by the CBN Act no24 of 1991 now CBN ACT 2007 and the banks and other financial institution Act no 25 of 1991(now BOFIA 2004). These laws empowers the CBN to carry out a supervisory and control functions on all commercial banks and other banks in the country

The powers as specified by section 39 of the CBN Act which may be expressed by the CBN from time to time in the supervisory and controlling functions include the powers to specify critical ration to call for information from banks and to inspect the books of any bank to under condition of secrecy.(Afolabi 2000:10s)

Section 30 and 7 and 8 of the banks and other financial acts no. 25 of 1991(now BOFIA 2004)stipulates that every banks shall produce on demand all the books,exercise of his functions. It also stipulates as punishable the willful refusal of any bank to produce such documents as well as negligence or willful furnishing of false information to CBN. The control of the banking industry by CBN is carried out in partnership with the federal government,which has the over all authority over the system.Thus the CBNinitiatestheguidingpolicymeasureandimplementsthemonlyasapproved by the government. The CBN measures to control the banks through a number of stages which include the identification of the objectives and targets of policy. Policy formulation, policy implementation and review as well as other extra measures for commercial banks (ogwuma2004:2).

Supervision and control by the CBN impact significantly on the activities  and performance of commercial banks between 1986 and early 2010,the supervisory and control measures of the CBN seemed ineffective on a number of occasions and this contributed to the hitherto,distress in the banking sector .Since 2004, there has been series of new supervisory and control measures introduced by the CBN into the banking system with the aim of improving the performance of the banking sector.towards examining the impact of supervision and control of CBN on commercial banks in view of how their performance is affected from the negative and the positiveperspectiveswithconcentrationontherolesthatCBNplayedfrom2004 to 2011.

 

1.2 STATEMENT OF THE PROBLEM

The supervision and control of commercial banks by CBN sometimes impact adversely on the operations and performance of the former.This is as a result of difficulties associated with the supervision and control mechanism.With respect to supervision, it appears that the CBN apparatus are not effective. Banks examination are often not timely,not regularly carried out or haphazardly done. Secondly,some of the CBN examiners are not sufficient competent and thirdly, they are not large enough to supervise all the commercial banks effectively.The result is that deficiencies to the operations of these banks are not timely discovered and adequately controlled. All these adversely affect the commercial banks. effective operations and performance of the commercial banks.Restrictive monetarycontrolmeasureslimittheliquidityandcapacityofcommercialbanks to grant loans or credit.Besides,direct interactions in banking activities by the CBN,sometimes have adverse effects too. In the light of the above mentioned,attempt will be made to appraise the impact of central  banks supervision and  control  on the performance of commercial banks.

 

1.3  OBJECTIVES OF THE STUDY

In lieu of the problems stated above,the objectives of the study are

1. To analyse the objectives of supervision and control of commercial banks in view of the existing monetary policies of the CBN.

2. To examine the effectiveness of the supervisory and control techniques of the CBN specifically the ability detect small practice on time

3. To assess the impact of supervision and control on the performance of commercial banks with regards to liquid it

4. To appraise the ongoing reforms of the CBN.

The following questions will be addressed in this study

1. To what extent do the relationship between the current monetary policies of the CBN and the performance of commercials banks as it affects granting loans/credit?

2. To what extent do the supervisory and control techniques effective enough to detect misconduct on time?

3. How can these functions of the CBN have any effect on the liquidity of commercial banks?

4. To what extent do the ongoing reforms by the CBN affect the performance of the commercial banks?

 

1.5  SIGNIFICANCE OF THE STUDY

Thesignificanceofthestudyderivesitsusefulnessfrommanyrespects.Firstly, the monetary authorities(CBN) and federal government will find the study very useful. This is because the  study will examine  the  various techniques of supervision and control of commercial banks and identify their deficiencies and constraints.ThisinformationwillthenenablethegovernmentandtheCBNto take remedial measures which will be suggested in this study. It will provide information on why many of the operate and perform dismally under the CBN supervisory and control functions. This will give these institutions an understanding of their weakness and the information will enable them to take corrective actions which again will be suggested in this study.

gain,  investors and banking public will appreciate this study because of the information it contains. The study will enable them to understand the role of the CBN in ensuring safety of their funds in the banks and this will help in sustaining their confidence in the banking industry.

Finallythestudywillbeusefultostudentswhowillcarryoutrelatedstudies;it will serve as a relevant material to them.

 

1.6  SCOPE OF THE STUDY

The study focuses on the importance of the CBN supervision and control on the performance of the commercial banks.Thus,its scope covers the need for supervision and control as well as goals,techniques and effects of these exercises on commercial banks operations and performances

 

1.7 LIMITATIONS OF THE STUDY.

1. 1. The difficulty of obtaining primary information from CBN and some commercial bank staff their uncooperative attitude may adversely affect primary data collection
2. 2. Inadequate finance which may pose a restriction with regards to travelling outside Enugu to include many more commercial banks for an extensive stud Therefore the study may be restricted to Enugu metropolis only.
3. 3. The difficulty of combining the research with other academic works in the school